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IN THE COURT OF APPEAL

OF NEW ZEALAND CA526/2017

In the Matter of Part 1 of the Judicature Amendment Act


1972
and in the Matter of an appeal from the decision of the High
Court
BETWEEN NORTHLAND REGIONAL COUNCIL

Appellant

AND RICHARD BRUCE ROGAN &


HEATHER ELIZABETH ROGAN
First Respondents

AND MANGAWHAI RATEPAYERS' &


RESIDENTS' ASSOCIATION INC
Second Respondent

AND KAIPARA DISTRICT COUNCIL

Respondent in Cross-Appeal

SUBMISSIONS ON BEHALF OF FIRST AND SECOND


RESPONDENTS IN SUPPORT OF CROSS-APPEAL

27 OCTOBER 2017

Henderson Reeves Lawyers 96 Bank Street


PO Box 11
Contact: Jeremy Browne Whangarei 0140
P: +64 9 430 4350
F: +64 9 438 6420
jeremybrowne@hendersonreeves.co.nz
401111.2
1

MAY IT PLEASE THE COURT:

1 In her interim judgment of 15 September 20161, Justice Duffy


dismissed challenges to:

(a) the rates of both the Northland Regional Council (NRC)


and the Kaipara District Council (KDC) on the basis that
setting of rates on a GST inclusive basis is not permissible;

(b) the penalties of both the NRC and the KDC on the basis that
it is impermissible to add a 10% penalty on unpaid rates
plus GST; and

(c) the penalties of the KDC on the basis of non-compliance


with various aspects of sections 57 & 58 of the Local
Government (Rating) Act 2002 (LGRA).

2 The respondents challenge these matters of the interim judgment


by way of cross-appeal.2 The cross-appeal is by way of re-hearing
and so this Court is to make its own decision on these matters.3
There are no contested facts. The issues are ones of law.

SUMMARY OF ARGUMENT

Rates & GST

3 Goods and Services Tax (GST) is a consumption tax paid by


consumers, albeit it is collected by registered persons who pay
the same to the Inland Revenue Department (IRD) at regular
intervals.

4 Local authorities are registered persons and have a duty to pay the
GST that is added to rates to the IRD. The time of supply, which is
the event that triggers GST, is, broadly speaking, when the rates
are invoiced.

5 The setting and assessing of rates is governed by the LGRA and


has nothing to do with GST. GST is not mentioned in the LGRA.

1 COA tab 8
2 COA tab 3
3 Austin Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103 (SC).
2

6 GST is not a rate or part of a rate. It does not fit within the
framework for the setting and assessing of rates. Accordingly, GST
should play no part in the setting of rates.

7 GST is only relevant at the invoice stage, which effectively is the


time of supply for GST purposes. It is the rates invoice which gives
rise to the liability of a ratepayer to pay rates plus GST (at the
requisite rate) by a particular date and creates a taxable supply.

Penalties & GST

8 As rates are not able to be set on a GST inclusive basis, then:

(a) because the KDC and NRC did set the rates on that basis,
it follows that the rates are invalid and any penalties added
are likewise invalid;

(b) the KDC and NRC have not imposed penalties in respect of
rates assessed, but rather rates assessed plus GST, which
is not allowed by section 58;

(c) the KDC and the NRC are in breach of section 57(3)(a) in
that the penalties are for more than 10% of the unpaid rates
as the penalties have been added to the unpaid rates plus
GST; and

(d) The local authorities are keeping for themselves the windfall
of the 10% penalty on the GST part of the unpaid rates
invoice.

Penalty compliance with the LGRA

9 A local authority must decide whether penalties will be added to


unpaid rates by way of resolution made no later than when the rates
are set. It is impermissible for a local authority to reserve to itself
the power to choose to add penalties later. The choice must be
made at the outset.

10 Once the choice is made, the addition of penalties does not involve
any discretion; it is mandatory. There can, however, be discretion

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in the remission of penalties (but a local authority must have an


appropriate rates remission policy in place).4

11 In using the word may, KDC and NRC purport to retain for
themselves the discretion as to whether or not to add penalties.
The High Court Judge was wrong to read may as must; the
context of the resolutions points to the opposite conclusion.

12 Sections 57 and 58 require: (1) the stating of the date that the
unpaid rates are to be quantified for the purposes of calculating the
penalty; (2) the date that the penalty is added to be stated; and (3)
the formula by which the penalty is calculated.

13 KDCs 2011/2012 penalty resolution5 fails to comply with sections


57 and 58 in that it does not state the date of calculation.

14 KDCs 2013/2014 penalty resolution,6 and the NRC penalty


resolutions for 2011/2012,7 2012/2013,8 2014/2015,9 and
10
2015/2016 fail to comply with the timing requirements in section
58(1)(b) & (c).

15 A local authority has the ability to choose from a number of possible


penalties. One of those options is to choose to add penalties on
penalties.

16 Here, however, the KDC and NRC penalty resolutions do not add
penalties to penalties, but limit penalties to unpaid rates
assessed. But in practice, both KDC and NRC have unlawfully
added penalties to penalties.

4 See the Local Government Act 2002, section 109.


5 COA tab 33
6 COA tab 37
7 COA tab 28
8 COA tab 29
9 COA tab 31
10 COA tab 32

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NARRATIVE OF FACTS

17 This cross-appeal requires very few facts. The issues raised are
legal ones: do the rates resolutions, penalty resolutions,
assessment of rates, and addition of penalties comply with the
LGRA?

18 The required factual material consists of the rating resolutions


(which include a penalty resolution) and the fact that compounding
penalties of 10% of the total amount outstanding (rates plus GST)
have been added.11

19 Local authorities typically pass a combined rates and penalty


resolution once a year in mid to late June, just before the start of a
new financial year, which begins on 1 July.

20 The joint chronology filed for the appeal sets out the relevant dates
of the resolutions.

SUBMISSIONS

Legal context

21 Rates are a form of tax12 and must be imposed pursuant to


Parliamentary authority.

22 It is the task of the Courts to determine, if called on to do so,


whether a local authority has exercised its rating powers lawfully
and reasonably.

23 Where the challenge is to the reasonableness of a particular rate,


or as to the spread of the rating burden among ratepayers, Courts
show deference to the decisions of the democratically elected
council which is politically responsible to its populace.13
Accordingly, for such challenges, the strict Wednesbury
14
unreasonableness standard is applied.

11 Paragraph 26 of the statement of claim at COA tab 4 (page 19) and statement of defence at tab
5 (page 30). Rating Information Database at COA tab 47 (page 441).
12 Franklin District Council v Cryer [2011] 1 NZLR 529 (HC) at [67] per Ellis J.
13 See Shaw v Attorney-General [2003] NZAR 216 (HC) at [95].
14 Wellington City Council v Woolworths NZ Ltd (No 2) [1996] 2 NZLR 537 (CA) at 545.

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24 Another type of challenge is that the local authority failed to follow


the statutory process. This does not involve any deference to the
local authority. There is no weighing up of a variety of competing
considerations in assessing reasonableness or spread of the rating
burden. Rather, it is a purely technical assessment as to whether
the law was followed.

25 As Miller J said in Mangawhai Ratepayers & Residents


Association Inc v Kaipara District Council [2015] NZCA 612 (CA) at
[101]:

The right to judicial review of local authority


borrowing and rating decisions is long-established
and powerful. Courts will not usually intervene in
rating decisions on reasonableness grounds, but
they respond readily to challenges for illegality.

26 Laws of New Zealand Rating at para 15 states:

Generally, rates made by a local authority must fulfil


certain requirements and the procedure for setting
rates is prescribed by statute. The onus of proof that
the statutory requirements have been met rests with
the local authority. An inability to prove the fulfilment
of these requirements is fatal to the validity of the
rate.

27 Cited in support of the last sentence are two cases:15

(a) Hendrey v Hutt County Council (1881) 3 NZLR 254. There,


Gillies J delivering the judgment of the Court of Appeal said
at 259-260:

It will be observed that by section 107 the


performance of certain other acts by the
Council is made a condition precedent to the
making of any rate by it. The performance of
these acts is made imperative, they "shall" be
done, and the acts so imperatively ordered to
be performed as a condition precedent to the
making of a rate are not of a mere technical
nature such as might be neglected without
any real injustice being done to the
ratepayers. Estimates of the works to be
done, their cost, the rateable value of the
property on the valuation roll, and the rate

15 Both incidentally cited by the Court of Appeal in MacKenzie District Council v ECNZ [1992] 3
NZLR 41 with approval, albeit for another point. Hendrey was also cited with approval by the Court
of Appeal in the earlier MRRA v KDC litigation.

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necessary to meet that cost, are to be made


and publicly notified for the information of the
ratepayers for fourteen days before making
the proposed rate, thus enabling ratepayers
to bring pressure to bear on their
representatives in the Council if they
disapprove of the works or the expenditure
upon them. This provision lays down the
prudent system for these local bodies that
they shall first determine upon what works
are necessary and what they will cost, and
then raise so much money as necessary,
and no more. There is in this a wise principle
not a mere technical detail, and this Court
ought to recognise the importance of this
provision by looking upon it as mandatory,
and not merely directory.

(b) Broad v County of Tauranga [1928] NZLR 702 where it was


alleged that the Council had failed to observe the formalities
provided by the then legislation rendered the rate illegal.
Justice Reed held at 706, The statute authorizes the
imposition of a tax, but only if the Council complies with the
conditions precedent imposed by the statute. Non-
compliance with such conditions renders the tax or rate
invalid.

28 This strict approach to questions of legality is reflected in local


government publications and training manuals.

29 The Society of Local Government Managers has published a


number of booklets and the like for the assistance of local
authorities.16 In its publication Rating KNOWHOW: a guide to the
Local Government (Rating) Act 2002 (November 2013), it says the
following after affirming that rates are a coercive tax (at p 6):

Rates are a tax and the Rating Act is a taxation


statute. A generally accepted constitutional principle
of taxation is that all decisions, actions and
procedures must be strictly in accordance with the
legislation governing the tax. That means that

only those rates authorised under the Rating Act


can be set and assessed anything else is unlawful
and likely to be set aside if challenged (the legal term
for this is ultra vires)

16 Ms Wiessing, counsel for the defendants, was involved in the preparation of the guide.

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rates must be set strictly in accordance with the


procedural steps and information requirements set
out in the Rating Act (rate-setting that does not
follow the prescribed process also runs a judicial risk
the person who said short-cuts make for long
delays had the rating process in mind)

there is little judicial tolerance for departures from


the legislative requirements even minor
typographical errors (for example, an and rather
than an or) could be sufficient to invalidate a rate.

These are not academic points ratepayers can and


will scrutinise your decisions and actions. Local
authorities set their rates in open council and follow
a process of consulting on their spending and rating
proposals through the long-term and annual plan
(more on this later). The information is therefore
readily available to the public.

30 Another SOLGM publication, Developing Local Authority Revenue


Systems an update (November 2008) it says the following (at 27):

Because rates are a form of mandatory tax imposed


on ratepayers, the law requires strict compliance
with the statutory procedures for authorising, setting
and assessing rates. Where these processes are
not correctly followed rates will likely be invalidated.

31 The strict approach to the matter is seen in the fact that Parliament
has had to pass validating legislation to correct errors in the rating
process. See for example the following legislation and the errors
listed in their respective preambles:

(a) Kaipara District Council (Validation of Rates and Other


Matters) Act 2013;

(b) Tasman District Council (Validation and Recovery of


Certain Rates) Act 2014; and

(c) Christchurch City Council (Rates Validation) Act 2015.

32 This cross-appeal is very much a legality challenge. It is to


determine whether rates have been set and assessed on a lawful
basis, and penalties added on a lawful basis. These matters all
involve application of the LGRA, which is a purely technical matter.
However, one must not fall into the trap of thinking that these
matters, while technical, are mere technicalities.

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33 The setting of rates is a fundamental foundational step17 in the


rating process under the LGRA, not a mere technicality. If the rate
is not validly set, the chain is broken, and further steps are legally
flawed.

34 An understanding of the rating process is necessary when testing


compliance with the statute. The process is summarised by the
learned High Court Judge at paragraph [8] of her interim judgment.
At [10], Her Honour concludes:

In principle, the rating process is an interlinked


chain. Once a material flaw in this process is
identified, the chain will be broken, which is likely to
result in a finding that the subject rates are invalid.

35 The adding of penalties is a draconian power and a local authority


must comply with the rules set down by Parliament in relation to
penalties. Unpaid rates are a charge against the rating unit. The
cross-appeal therefore concerns matters at the very heart of the
rating process and of great significance to citizens.

GST

36 Goods and Services Tax was introduced on 1 October 1986 at the


rate of 10%. On 1 July 1989, Parliament increased it to 12.5%. On
1 October 2010, Parliament further it increased to 15%. Local
government had no control over any of these changes; they were
a result of changes in central government taxation policy. Central
government can increase or lower the rate of GST at any time, with
any amount of notice that it sees fit. Application of GST to rates is
a purely arbitrary decision, and some point out that it is a tax on a
tax. Parliament could, at the stroke of a pen, eliminate GST from
rates (or anything else).

37 GST is a central government consumption tax. It has nothing to do


with local government activities. Local government is not a direct
recipient of any of the proceeds of GST collection.

17 Following consultation on the proposed rates.

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38 In contrast, rates are a local government tax used to fund local


government activities as stated in s 3(a) of the LGRA.

High Courts reasoning was flawed

39 The learned High Court Judge held, correctly, that it is suppliers


who have the obligation to pay GST to the IRD.18 However, Her
Honour then concluded from that that a ratepayer does not pay
rates plus GST.

40 It is to be noted that the learned High Court Judges analysis was


all in terms of payment, whereas the issue here comes earlier in
the rating process. What is a local authority permitted to do when
setting and assessing rates? That is a question of construction of
the LGRA.

41 In addition, it is submitted that the learned High Court Judges


reasoning conflates two separate matters: the identity of the person
on whom the tax falls, and the identity of the person who collects it
and pays it.

42 As McKay J19 said in LR McLean & Co Ltd v Commissioner of


Inland Revenue [1994] 3 NZLR 33 (CA) at 36:

The Goods and Services Tax Act 1985 provides for


the imposition and collection of a tax which applies
to almost every supply of goods and services within
New Zealand. As Greig J said, it is basically a
consumer tax, with the incidence of the tax
falling on the ultimate consumer of the goods
and services. The obligation for payment of the
tax is, however, placed upon those suppliers
who are registered under the Act. Every person
carrying on a business as a supplier of goods and
services for consideration and having a turnover in
excess of $30,000 pa is required to be registered (ss
6 and 21). Where the turnover is less than that
figure, the person may choose to become
registered, but is not bound to do so.

[Emphasis added]

43 And at 37:

18 Interim decision at [63].


19 With whom the other members of the Court agreed.

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This tax is described in the Act as the output tax. The


supplier, if registered, is required to make periodic
returns and to pay the output tax (ss 16 and 23). The
supplier will add the tax to the price he charges the
purchaser, or allow for it in that price, and must on
request provide a tax invoice showing the amount of
the tax or stating that it is included in the total
consideration shown (s 24).

To ensure that tax is paid only by the ultimate


consumer, the registered supplier is entitled to
deduct from the output tax the tax which he had
paid to his own suppliers. This is called the input
tax, and covers all the tax paid by that registered
supplier on all the goods and services supplied to
him in the course of his taxable activity (s 20). The
effect is that in general each supplier through whom
goods pass on their way to the ultimate consumer
pays tax on the added value he has contributed to
the goods, and the total tax so paid is eventually
borne by the ultimate purchaser of the goods.

[Emphasis added]

44 To similar effect, Judge Willy in Taxation Review Authority Case 8


(1994) 18 TRNZ 802 said at 803:

The general scheme of the Act is to charge GST on


each step in the chain of production and distribution,
so that each registered person who pays GST can
claim it back leaving only the ultimate consumer to
bear the tax.

45 In King v Bennetts (1994) TRNZ 147 (CA), McKay J for the Court
said at 153:

Registered persons must pay tax on all sales of


goods and services, but are entitled to add it to the
price. Such persons can obtain refunds of the GST
paid by them on their own purchases from registered
suppliers. This effectively means that each person
through whose hands a product passes will in the
end pay tax only on the added value, with the total
tax being paid in the end by the ultimate consumer.

46 That it is the end-user of services or goods that ultimately pays GST


is seen in the following:

(a) GST is charged directly to the recipient on goods that are


imported.

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(b) The supplier merely collects GST collected from supplies


made and is entitled to deduct a GST input credit in respect
of outgoings paid.

(c) A supplier may recover GST paid to the IRD if the recipient
fails to pay.

47 In terms of local authorities, section 5(7)(a) of the GST Act defines


supply as follows:

every local authority is deemed to supply goods and


services to any person where any amount of rates is
payable by that person to that local authority:20

48 The time of supply is set out in section 9(8) of the GST Act as
follows:

Despite subsection (1), if a local authority makes a


supply to which section 5(7)(a) applies, the supply is
treated as taking place on the earlier of the following
dates:

(a) the date on which an instalment notice is issued


if the instalment notice requires payment of an
instalment by a particular date:

(b) the date on which payment is required by the


instalment notice:

(c) the date on which payment is received.

49 GST is a consumption tax charged on the value of supply - see


s 8(1) of the GST Act 1985. The value of a supply is the amount
paid for the supply, exclusive of GST (s 10). In this context, the
value of the supply is rates (excluding GST).

50 In the normal course of events, the time of supply will be when the
rates invoice for the current instalment is issued. At that time GST
will be added to the amount of rates assessed (the value of supply),
and the ratepayer will be invoiced for the total.

20The liability to pay rates by a particular day is triggered by delivery of the rates invoice: LGRA, s
46-48.

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What does the LGRA require?

51 The setting of rates is the formal statutory process through which


the proposed rates become lawful rates and may be assessed and
invoiced against rating units in the district. As a formal statutory
process for setting coercive charges, the statutory requirements
must be strictly adhered to.

52 Prior to rates being set, there are various consultation and other
requirements contained in the Local Government Act 2002 (LGA).
These include the obligations on a local authority to balance the
books (s 100 LGA), include funding impact statements in the long
term plan (clause 15 of Schedule 10 to the LGA), and adopt funding
and financial policies (s 102 LGA). The essence of these
requirements is that the funding sources to meet expenditure must
be clearly stated in these documents and policies. GST is not a
funding source of a local authority and therefore has no relevance
to such matters. Local authorities do not treat GST in that way and
when considering the funding that will be provided by rates it does
so on a GST exclusive basis.

53 After these consultation and other requirements are attended to,


rates are set by resolution of the local authority: LGRA, s 23. There
is no mention in this section of GST. In fact, the LGRA does not
have even a single reference to GST in it. GST has nothing to do
with the formal process of setting rates.

54 The term rates is defined in such a way as to exclude GST.


Section 5 of the LGRA defines rates as follows:

Rate

(a) means a general rate, a targeted rate, or a


uniform annual general charge that is set in
accordance with subpart 2 of Part 1;

(b) includes a penalty added to a rate in accordance


with section 58; but

(c) does not include a lump sum contribution

55 Pursuant to subpart 2 of Part 1 of the Rating Act, those rates may


only be set in respect of values, categories, matters and factors

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relating to land situated in the territorial authority's district (ss 13-20


LGRA).

56 GST cannot be added to rates at the time that they are set because:

(a) The GST Act stipulates the time of supply as being, in


simple terms, the issue of the invoice.

(b) The LGRA does not permit charges other than rates to be
set as rates.

(c) Rates that are set are only general in nature. They are not
linked to any particular rating unit or any ratepayer. At the
time that rates are set, there is no supply of goods or
services, there is no supplier, and no recipient. The GST
Act and its provisions have no relevance.

57 Rates may only be assessed in accordance with a rating unit's


rateable values or the factors relevant to it (s 43 LGRA).

58 GST cannot be added to rates at the time that they are assessed
because:

(a) The GST Act stipulates the time of supply as being, in


simple terms, the issue of the invoice.

(b) Rates must be assessed in accordance with either values,


factors or quantity of water only (s 43 LGRA). GST can play
no part.

(c) The process of assessing rates which is a mathematical


or mechanical process - does not in and of itself create any
liability for rates. The liability for rates only arises on the
delivery of a rates assessment notice that includes the
statutory information (s 43 LGRA) to the ratepayer (s 44(2)).
Importantly the liability to pay the rates by a certain date
does not arise until a rates invoice with the statutory
information (s 46(2)) is delivered to the ratepayer (s 46(1))
at least 14 days before the due date (s 48(3)).21 It is not

21Note the slight discrepancy between the GST Act issue of the invoice and the Rating Act
the delivery of the invoice.

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until that occurs that there is effectively a supply, a supplier


and recipient in terms of the GST Act. At the assessment
stage the GST Act can play no part.

59 To find that GST has relevance at a time in the rating process


where there is no supply of any goods and services, no supplier,
no recipient is quite incorrect.

What did the KDC and NRC do?

60 Generally the NRC and KDC set rates on a GST inclusive basis,
which is in accordance with the advice of the SOLGM publications
and appears to be the predominant approach nationwide. This
appears to be as a result of the computer programme local
authorities use and, presumably, because of the windfall of being
able to charge penalties on the rates plus GST amount.

61 Of course, the fact that many if not all local authorities adopt the
same position to this issue is irrelevant to the question of whether
that stance is legal.

62 It is perhaps of some significance that the 2010/2011 financial year


which was the year that GST rate increased to 15% - the KDC,
NRC, and many other councils set rates on a GST exclusive basis.
Clearly it is possible in practice to set rates on a GST exclusive
basis.

GST on penalties

63 The answer to this issue is determined - one way or the other by


the answer to the above issue.

64 Sections 57 and 58 of the LGRA allow a local authority to add


penalties to unpaid rates in accordance with the requirements of
those sections.

65 The LGRA requires that penalties are to be imposed on rates


assessed:

(a) Section 58(1)(a) provides that the penalty known as the


instalment penalty is on unpaid rates assessed.

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(b) Likewise, the first of the further penalties, provided by


section 58(1)(b), is on unpaid rates assessed.

(c) The second further penalty is in respect of unpaid rates for


which the above further penalty had earlier been imposed.
Logically, this must be rates assessed together with any
penalties added to those rates.

66 It has been submitted above that GST can play no part in the
assessment of rates. This same point applies equally to the adding
of penalties to GST on rates assessed. Only rates, as defined in
the LGRA, can be assessed. Penalties are added to rates.

67 Treating the rates as though they included GST would mean that
local authorities would be adding a 10% penalty on the GST in
addition to the penalty on the unpaid rate itself. And instead of
paying the penalty on the GST to the IRD, the local authority would
be keeping it as something of a windfall. It is submitted that this
cannot be correct. GST is a consumption tax that is added (at the
then applicable rate) at the time of supply.

68 Imposing a 10% penalty on the GST inclusive amount of the unpaid


sum also results in an unlawful penalty that is in excess of the 10%
of rates assessed (the maximum permitted by s 57(3) and 58(1)).

Compliance with sections 57 & 58 of the LGRA

69 The power to add penalties to unpaid rates is a draconian power


exercisable by local authorities to encourage the timely payment of
rates.

70 Penalties are of significant size in and of themselves (up to 10% of


the unpaid rates)22 and, unlike court ordered interest, can be
cumulative in nature.23 They can effectively be added every six
months, meaning unpaid rates assessed of $100 can grow to
$133.10 in as little as a year and a day.24

22 Rating Act, s 57(3)(a).


23 Rating Act, s 58(2)(a).
24 $100 x 1.1 x 1.1 x 1.1 = $133.10.

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71 There are relatively few requirements for the addition of penalties25


sections 57 and 58 - but these are mandatory and strict
compliance is necessary. Those sections read:

57 Penalties on unpaid rates

(1) A local authority may, by resolution, authorise


penalties to be added to rates that are not paid by
the due date.

(2) A resolution made under subsection (1) must

(a) be made not later than the date when the


local authority sets the rates for the financial
year; and

(b) state

(i) how the penalty is calculated; and

(ii) the date that the penalty is to be


added to the amount of the unpaid
rates.

(3) A penalty must not

(a) exceed 10% of the amount of the unpaid


rates on the date when the penalty is added;
or

(b) be added to rates postponed


under section 87 until the rates become
payable.

58 Imposition of penalty

(1) A local authority may impose the following types


of penalty:

(a) a penalty on rates assessed in the


financial year for which the resolution is
made and that are unpaid after the due date
for payment (or after a later date if so
specified):

(b) a further penalty on rates assessed in any


financial year and that are unpaid on
whichever day is the later of

(i) the first day of the financial year for


which the resolution is made; or

25 There are also consultation requirements in the Local Government Act 2002, but these are not
relevant to the present case.

401111.2
17

(ii) 5 working days after the date on


which the resolution is made:

(c) a further penalty on rates to which a


penalty has been added under paragraph
(b), if the rates are unpaid 6 months after that
penalty was added.

(2) The amount of unpaid rates to which a penalty


may be added includes

(a) a penalty previously added to unpaid


rates under this section; or

(b) additional charges added to unpaid rates


under section 132 of the Rating Powers Act
1988; or

(c) rates levied under the Rating Powers Act


1988 that remain unpaid.

72 It is submitted that the effect of these sections is as follows:

(a) The local authority must make the decision whether or not
to impose penalties on unpaid rates (s 57(1)). If the
decision is to impose penalties, then that decision must be
made by way of a resolution passed no later than the
resolution setting rates (s 58).

(b) There are three different types of penalties which can be


added (s 58(1)) and a local authority must select which of
these it wishes to have. The local authority also has a
discretion as to the size of the penalty to be imposed up
to a maximum of 10% of the unpaid rates (s 58(1) & 57(3)).

(c) Consistent with one of the purposes of the LGRA (s 3(c)),


namely to provide processes and information to enable
ratepayers to identify and understand their liability for rates,
the penalty resolution must state how the penalty is to be
calculated (s 57(2)(b)(i)).

(d) Calculation is inherently a mathematical process and the


only way a local authority can properly state how the penalty
is to be calculated (s 57(2)(b)(i)) is to set out the date used
to calculate the amount of unpaid rates and also the
percentage penalty to be applied.

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18

(e) In relation to the first and second further penalty, there are
timing requirements specifying the date of calculation (s
58(1)(b) & (c)).

(f) Section 57(2)(b)(ii) also explicitly requires the date of


addition of the penalty to be stated.

73 The penalties of the NRC and KDC are flawed for a variety of
reasons, as set out in the tables attached to a joint memorandum
of counsel.26

Wrongly reserves option to add penalty

74 A local authority must decide whether or not to add penalties and,


if so, encapsulate that decision in a penalty resolution. It cannot
decide to give itself the option to later add penalties. It either does
not have penalties, or it does, in which case penalties must be
added in accordance with a formula.

75 The possible harshness of the penalty regime can be alleviated by


the local authority adopting a rates remission policy. This policy
can include the remission of penalties. So, once the election to add
penalties has been made, the only scope for the operation of
discretion is after the penalty is imposed via a rates remission
policy.

76 The KDC penalty resolutions for the 2012/201327 and 2014/201528


financial years and the NRC penalty resolutions for the 2013/201429
and 2014/201530 financial years purport to reserve to the local
authority a power to later add a penalty. This is impermissible.

77 The High Court did not disagree with the above propositions as to
the statutory framework. However, the learned judge held that the
may in s 57(1) was mandatory rather than permissive.31

26 COA tab 7
27 Minutes of 29 August 2012. Tab 36 of the COA erroneously has a duplicate of earlier minutes.
The relevant text of the resolution is quoted in the interim judgment at para [77].
28 COA tab 38
29 COA tab 30 page 356
30 COA tab 31 page 356.
31 Citing Far North District Council v Local Government Commission [1994] 3 NZLR 78 (HC) at 84

85.

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19

78 In Friskies Ltd v Heinz-Wattie Ltd [2003] 2 NZLR 663, a trade mark


case, Ronald Young J said at [13]:

Typically, where Parliament has used the word


shall then subject to established prerequisites
there appears to be no discretion to be exercised.
Where may is used then the word appears to be
permissive and a discretion is typically assumed.
But in the end, it depends upon the statutory context
and the particular power to be exercised
(see Gibson v Manukau City [1968] NZLR 400).

79 Consistent with this, many cases treat the word may as being
discretionary.32 For instance, in Re Wilson Home Trust [2000] 2
NZLR 222 it was held that may in section 28 of the Local
Legislation Act 1949 conferred a full discretion. At [43], Laurenson
J quoted from Windeyer J in Finance Facilities Pty Ltd v
Commissioner of Taxation of the Commonwealth (1971) 45 ALJR
615 (HCA). The quote from the Australian case is as follows:

The question, which comes back to the words `may


allow', is not to be solved by concentrating on the
word `may' apart from its context. Still less is the
question answered by saying that `may' here means
`shall'. While Parliament uses the English language
the word `may' in a statute means may. Used of a
person having an official position, it is a word of
permission, an authority to do something which
otherwise he could not lawfully do. If the scope of
the permission be not circumscribed by context or
circumstances it enables the doing, or abstaining
from doing, at discretion, of the thing so authorised.
But the discretion must be exercised bona fide,
having regard to the policy and purpose of the
statute conferring the authority and the duties of the
officer to whom it was given: it may not be exercised
for the promotion of some end foreign to that policy
and purpose or those duties. However, that general
proposition is irrelevant in this case. Here the scope
of the permission or power given is circumscribed.
Conditions precedent for its exercise are specified
as alternatives. The question then is, must the
permitted power be exercised if one of those
conditions be fulfilled?

This does not depend on the abstract meaning of the


word `may' but of whether the particular context of

32 See also Daemar v Soper [1981] 1 NZLR 66 (CA); Television New Zealand Ltd v Police [1995] 2
NZLR 541; Mercury Energy Ltd v Utilicorp New Zealand [1997] 1 NZLR 492 (HC). See also Board
of Trustees of the National Provident Fund v Shortland Securities Ltd [1996] 1 NZLR 45 (CA) giving
the word may in a lease its normal meaning of conferring discretion.

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20

words and circumstance make it not only an


empowering word but indicate circumstances in
which the power is to be exercised so that in those
events the `may' becomes a `must'.

80 The case relied on by the learned High Court Judge - Far North
District Council v Local Government Commission is quite
distinguishable. In that case, there were clear statutory indications
showing that the term may in section 37ZZS of the Local
Government Act 1974 meant must (at 84-85 of the judgment).

81 Here, in the rating resolutions themselves, the context strongly


shows that a deliberate decision was being made. In relation to the
NRC penalties:

(a) The NRC penalty resolutions for both the 2013/2014 and
2014/2015 financial years in respect of NRC rates in the
Kaipara region have a difference in wording compared to
those in the Whangarei and Far North regions (may vs
must).

(b) Furthermore, the discretionary word may has been used


three times. It appears to be a deliberate decision.

(c) This is supported by the fact that the form of wording was a
change compared to previous years. For instance, in the
2012/2013 financial year, the word will was used
throughout.33

82 In relation to the KDC penalties, for both the 2012/201334 and


2014/2015 financial years, the word may has been used three
times consistently throughout the resolution.35

83 Even if the resolutions were poorly drafted as opposed to being as


a result of a conscious choice, that does not change the fact that
they say may. It is up to a local authority to decide whether or not
to have a penalties regime and, if so, the type and amount of
penalties. That choice must be made by way of a resolution.

33 COA tab 29, page 348.


34 COA tab 36, page
35 COA tab 38, page 418. The relevant page of the 2012/2013 resolution has been omitted from the

case on appeal but is quoted in the interim judgment at paragraph [77].

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21

Irrespective of whether the choice was a bad one, or the document


recording the choice was imperfectly drawn, the fact is that the
outcome does not comply with the LGRA. Ratepayers are entitled
to strict compliance from their councils (which of course have the
ability to obtain professional advice on how to do things correctly).

Requirements of sections 57 & 58

84 In adding a penalty, there are two crucial dates. The first is the date
that is used in quantifying the unpaid rates for the purpose of
calculating the penalty. This can be referred to as the date used
in the calculation. The second date is the date the penalty is to be
added.

85 In respect of the instalment penalty, it is submitted that section


58(1) requires the date used in the calculation to be stated. The
date the penalty is to be added is also required as per section
57(2)(b)(ii).

86 In respect of the further penalties, there is no ability to choose the


date used in the calculation. This is determined by s 58(1)(b)(i).
One simply takes the date of the penalty resolution, counts forward
5 working days36 and then adopts the later of that date or 1 July of
the relevant year. The date used in the of calculation of the second
further penalty (s 58(1)(b)(ii)) is six months after this date.

87 Compare sections 57 & 58 with section 132 of the former Rating


Powers Act 1988.

Failure to state date of calculation

88 The KDCs 2011/2012 penalty resolution reads:37

That the Council delegates authority to the Chief


Executive and the Management Accountant to apply
the following penalties on unpaid rates:

A penalty of 10 per cent will be added to each


instalment or part thereof which are unpaid
after the due date for payment.

36 There is no definition of working day in the Rating Act, so the definition in section 29 of the
Interpretation Act 1999 will apply.
37 COA tab 33, page 390.

401111.2
22

Previous years rates which remain unpaid


will have a further 10 per cent added on 10
July 2011, and again on 10 January 2012.

89 At [85] of the interim decision, the learned High Court Judge held,
correctly, that:

section [58(1)(b)] establishes a threshold for the


imposition of further penalties: namely, that a local
authority may impose further penalties in respect of
rates which remain unpaid after either the first day
of the rating year, or five days after the date of the
penalty resolution, whichever is later. Provided that
threshold is met, the timing of the penalty is left to
the discretion of the local authority. There can be no
objection to the 2011/2012 penalty resolution on this
basis.

90 With respect, Her Honour has completely missed the point that the
LGRA requires the date used in the calculation to be stated.
Otherwise, a local authority does not comply with its obligation to
state how the penalty is calculated in section 57(2)(b)(i). The
above resolution fails to do this. It only states when the penalty will
be added. That is not enough for compliance.

Failure to comply with timing requirements

91 The KDCs 2013/2014 penalty resolution reads:38

b. A penalty of 10 per cent of the amount of all rates


assessed in any financial year that are unpaid on 1
July 2013 will be added on the day following that
date.

c. A penalty of 10 per cent of the amount of all rates


to which a penalty has been added under (b) and
which are unpaid on 1 January 2014 will be added
on the day following that date

92 Here we can see that the resolution has stated the date of
calculation (1 July 2013) and has also stated the date of addition of
the penalty (2 July 2013). It has also stated how the penalty is
calculated (10% of rates assessed which are unpaid on the date of
calculation).

38 COA tab 37, page 409.

401111.2
23

93 The problem, however, is that the dates do not correspond with the
timing requirements of section 58(1)(b).

94 The learned High Court Judge, however, held otherwise. After


correctly determining that 5 working days after the resolution was
2 July 2013, and so the later of 1 July 2013 and 5 working days
after the resolution is 2 July 2013, her Honour went on to analyse
the compliance of the resolution with these dates. Her Honour said
at paragraph [88] of the interim decision:

In order to determine whether the timing of that


further penalty was lawful, it is necessary to
ascertain the meaning of the phrase: rates that
are unpaid on whichever day is 5 working days
after the date on which the resolution is made.
Specifically, it is necessary to determine whether the
KDCs jurisdiction to impose a further penalty arose
on 2 July 2013, or after 2 July 2013. I consider that
the former interpretation is more consistent with the
text and purpose of s 58(1)(b). It follows that there is
no objection to the KDC penalty resolution for the
2013/2014 rating year on this ground.

95 Again, with respect, Her Honour has missed the point. It is correct
that the date used in the calculation is 2 July 2013. There is no
reason why the date of addition cannot also be 2 July 2013 (or
afterwards - obviously it cannot be before 2 July 2013). But that is
not the point. The point is that the KDC penalty resolution purports
to make the date used in the calculation 1 July 2013. Thus the
resolution is not in accordance with section 58 and so is unlawful.

96 It is to be noted that the KDC resolution could be prejudicial to


ratepayers. Say a ratepayer has $1,000 of unpaid rates from a
previous financial year and pays these rates on the morning of
2 July 2013. On the KDCs penalty resolution, a $100 penalty could
be added as there were unpaid rates on 1 July 2013, which is the
date referred to in the KDC penalty resolution. However, section
58 requires the rates to be unpaid on 2 July 2013 before a penalty
can be added, and on this example they would be and so no further
penalty could be added.

97 The same criticism can be made of the second further penalty. The
date of calculation in the resolution (1 January 2014) is a day earlier
that the date required by statute.

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24

98 The NRC penalty resolutions for 2011/2012, 2012/2013,


2014/2015, and 2015/2016 likewise fail to comply with the timing
requirements in section 58(1)(b) & (c).

Failure to choose to add penalties to penalties

99 As stated, section 58 provides the menu of penalties that may be


selected by a local authority and included in the penalties resolution
under s 57 to make them legally binding.

100 The penalty options are those included set out in s 58(1) and s
58(2). The latter includes the option of adding penalties on
penalties - section 58(2) uses the expression may be added
clearly showing a discretion. However such an option must be
stated in the penalty resolution to meet the requirement under s
57(2)(b)(i) to state how the penalty is calculated.39

101 Here the KDC40 and NRC41 have chosen to only add penalties to
rates assessed. However, contrary to this, they have in fact
added penalties to penalties. It is submitted that all such penalties
have been added unlawfully.

102 The High Courts interim judgment at [89] to [94] records out the
competing considerations well. The issue comes down to one of
interpretation: does the term rates assessed in the resolutions
mean rates assessed plus penalties on those rates?

103 Duffy J held that the authorisation to add penalties to rates


assessed entitled the local authority to add penalties not only to
the rates but also to the penalties previously added to those rates.
Her Honour found support in the s 5 definition of rate which includes
a penalty added to a rate in accordance with section 58.
However, the learned Judge failed to take into account the proviso
at the commencement to s 5 which states: In this Act, unless the
context otherwise requires .

39 Note also that this is an example of where the context clearly shows that the term rates does not
include penalties.
40 All rating years from 2011/2012 to 2015/2016 financial years inclusive.
41 All rating years from 2011/2012 to 2015/2016 financial years inclusive.

401111.2
25

104 It is clear that in sections dealing with rates and penalties such as
sections 57 and 58 the context requires that each word must have
its separate distinct meaning. This is reinforced by the fact that the
expression in question is rates assessed. That makes it clear
beyond doubt that it refers to rates only and to rates that have been
assessed.

105 While the definition of rates in section 5 of the LGRA includes


penalties added to rates,42 that definition is subject to the context
not requiring otherwise. Section 58(2) specifically says that a local
authority may opt to add penalties to penalties. Thus, the context
of section 58 is clear that the term rates assessed does not
include penalties.

106 The whole point of the requirement in section 57(1)(a)(i) to state


how the penalty is calculated is to ensure that ratepayers are fully
aware of their liability for penalties. This triggers two of the main
purposes of the LGRA under s 3 of the Act, namely that rates
should be set in accordance with decisions that are made in a
transparent manner, and providing for processes and information
to enable ratepayers to identify and understand their liability for
rates.

107 Furthermore:

(a) The term rates assessed relates to the original amount of


rates assessed on a rating unit. It cannot sensibly mean
anything else.

(b) If a local authority wishes to use the term rates assessed


and capture penalties added to such rates, it could easily
say so explicitly, for example rates assessed and any
penalties added to those rates. Here, the NRC and KDC
did not do so.

(c) The construction adopted by the learned High Court Judge


effectively removes the discretion conferred on a local

42 See also Porterfield v Peninsula County & Seaton [1939] NZLR 607.

401111.2
26

authority in s 58(2) to choose whether to add penalties to


penalties.

CONCLUSION

108 Rates cannot lawfully be set on a GST inclusive basis. Doing so


renders the KDC and NRC rates to be unlawful. Therefore, any
penalties added to such rates are also unlawful.

109 For the above reasons, the High Court was wrong to dismiss the
challenges to the KDC penalties. In particular:

(a) The KDC penalties resolution for the 2012/2013 and


2014/2015 financial years do not authorise the adding of
penalties but instead unlawfully purport to confer an option
to later add penalties;

(b) The KDC penalty resolution for the 2011/2012 financial year
does not state the date used in the calculation of either of
the further penalties, thereby breaching s 57(2)(b)(i).

(c) The KDC penalty resolution for the 2011/2012 financial year
does not specify the date the instalment penalty will be
added, thereby breaching s 57(2)(b)(ii).

(d) For none of the rating resolutions, has KDC chosen to add
penalties onto penalties, but instead has limited such
penalties to rates assessed.

110 There are no proper discretionary reasons to prevent the setting


aside of the rates and penalties. This will be addressed in the
submissions in response to the appeal.

111 In terms of costs, this is public interest litigation and of significance


to all local authorities accordingly. Furthermore, the respondents
by their members fund a portion of the appellants legal costs by
way of their rates. It is submitted that the Councils should bear all
of the costs.

401111.2
27

Dated: 27 October 2017

J A Browne
Counsel for the Respondents (Cross-Appellants)

401111.2
28

TABLE OF AUTHORITIES

Statutes
Goods and Services Tax Act 1985
Local Government Act 2002
Local Government (Rating) Act 2002
Kaipara District Council (Validation of Rates and Other Matters) Act 2013
Tasman District Council (Validation and Recovery of Certain Rates) Act
2014
Christchurch City Council (Rates Validation) Act 2015

Cases
Franklin District Council v Cryer [2011] 1 NZLR 529 (HC).
Shaw v Attorney-General [2003] NZAR 216 (HC).
Wellington City Council v Woolworths NZ Ltd (No 2) [1996] 2 NZLR 537
(CA)
Mangawhai Ratepayers & Residents Association Inc v Kaipara District
Council [2015] NZCA 612 (CA)
Hendrey v Hutt County Council (1881) 3 NZLR 254
MacKenzie District Council v ECNZ [1992] 3 NZLR 41
Broad v County of Tauranga [1928] NZLR 702
LR McLean & Co Ltd v Commissioner of Inland Revenue [1994] 3 NZLR
33 (CA)
Taxation Review Authority Case 8 (1994) 18 TRNZ 802
King v Bennetts (1994) TRNZ 147
Porterfield v Peninsula County & Seaton [1939] NZLR 607
Friskies Ltd v Heinz-Wattie Ltd [2003] 2 NZLR 663
Far North District Council v Local Government Commission [1994] 3 NZLR
78 (HC)
Re Wilson Home Trust [2000] 2 NZLR 222
Finance Facilities Pty Ltd v Commissioner of Taxation of the
Commonwealth (1971) 45 ALJR 615 (HCA)
Daemar v Soper [1981] 1 NZLR 66 (CA)
Television New Zealand Ltd v Police [1995] 2 NZLR 541
Mercury Energy Ltd v Utilicorp New Zealand [1997] 1 NZLR 492 (HC)
Board of Trustees of the National Provident Fund v Shortland Securities
Ltd [1996] 1 NZLR 45 (CA)

Texts
Laws of New Zealand Rating
SOLGM publication, Rating KNOWHOW: a guide to the Local Government
(Rating) Act 2002 (November 2013)
SOLGM publication, Developing Local Authority Revenue Systems an
update (November 2008)

401111.2